The Big Six in Q2 2017

Jan Dawson

7 months ago

Reading Time: 5 minutes

Every quarter, one of the decks I put together as part of my Jackdaw Research Quarterly Decks Service is a comparison of financial and operating metrics for the “big six” consumer tech companies – Alphabet, Amazon, Apple, Facebook, Microsoft, and Samsung. As I’ve done for several previous quarters, I’m also doing a quick run-through here of some of the highlights from this quarter’s deck. And you’ll find the full deck embedded at the bottom of this post. You can learn more about the Jackdaw Research Quarterly Decks Service here.

Some Context

Before we dive into individual charts, it’s worth noting some trends and themes that will provide useful context for this quarter’s comparisons:

Samsung had its best quarter ever, with record revenues and profits, driven largely by its semiconductor business, but also to an extent by the slightly later than usual launch of its new flagship smartphones

Microsoft closed its acquisition of LinkedIn in Q4 2016, and the employees and revenues associated with that business now show up in its reported results

Facebook has been warning of a slowdown in ad revenue in 2017 since late last year, due to the saturation of ad load within the News Feed, where most of its ads show up, but there’s so far little sign of it, though it says it should show up in H2 2017. Meanwhile, it’s begun investing more heavily in video content and is driving a shift to video advertising, which will have lower margins than its traditional advertising

Amazon appears to be entering another phase of higher investment in pursuit of growth in its e-commerce, AWS, and even advertising businesses, hiring rapidly and raising capital expenditures significantly over the past year, and that is now flowing through to lower profits

Apple is in the middle of a return to growth, after three quarters of decline, and that growth appears to be accelerating a little ahead of this fall’s widely reported launch of its first dramatically different iPhones in years

Alphabet is in some ways the most stable of these businesses, providing fairly predictable revenue growth and margins, though it’s also undergoing a big push around enterprise cloud services while reducing capital expenditures and cutting costs in its Other Bets business.

With that out of the way, let’s get on to some of the key comparisons.

Revenues and Revenue Growth

As it did last year, Samsung came out on top in terms of revenue in Q2, beating out Apple in its lowest quarter of the year, thanks to its strong semiconductor and to a lesser extent smartphone growth. On an annualized basis, though, Samsung remains far behind Apple, where it’s been ever since its fall from its peak in 2014. Meanwhile, Amazon continues to rapidly close the gap with the top two on an annualized basis, and had by far the strongest dollar growth year on year of any of the six companies, a position it’s held ever since Apple began to come down from the massive growth cycle it experienced in 2015 thanks to the iPhone 6. Facebook, meanwhile, remains by far the smallest of the six in revenue terms, though its year on year dollar growth matches that of Samsung, and its percentage growth rate year on year outstrips all the others by a considerable margin. All of these results are shown in the charts below, which you can magnify by clicking on them.

Profitability

When it comes to net profits, Samsung came out top this quarter, for the first time since its earlier peak in 2013, with Apple out in front in the interim. However, it’s worth noting that this doesn’t make Samsung “the most profitable tech company” as I’ve seen numerous headlines suggest: as with revenue, on an annual basis Apple remains far out ahead, and this quarter’s result was a quirk of a particularly strong quarter from Samsung in what’s seasonally Apple’s lowest quarter. Meanwhile, Facebook continues to close the gap with Microsoft and Alphabet in dollar terms, reaching nearly $4 billion of net profit in the quarter, and it closed the gap significantly in operating profit dollars. On net margin, Facebook remains way out ahead, with what has been a largely unbroken rise over the last couple of years to over 40% net margins. Microsoft came in second in margins this quarter off the back of a tax gain, while it and Alphabet were essentially tied in dollar terms. Amazon, meanwhile, saw a dip to its lowest net margin in two years.

Investment: Capex, R&D, and People

We’ll look lastly at three measures of investment: capital expenditures, research and development spending, and hiring. On the capex side, Samsung has dramatically increased its investment recently, with much of the investment going into its semiconductor business to support capacity increases to meet recent high demand. Samsung’s overall capital intensity is now nearly 20%, but in its semiconductor business it was over 40% in Q2, a level almost unheard of in such a mature business. Samsung is now ahead of the pack in both dollar spending, by quite some distance, and in capital intensity as well. Facebook, too, spends highly as a percentage of revenue on capex, investing heavily in data centers in particular. Apple’s capex continues to fluctuate widely from quarter to quarter based on the timing of specific investments across the year, and tends to manage its capex budget on an annual rather than quarterly basis as a result.

When it comes to R&D spending, the picture looks rather different. There, it’s Alphabet that’s out ahead in dollar terms, with a rapid rise over the last few years, despite a brief slowdown in late 2016. Much of Alphabet’s Other Bets segment is in areas where there’s high R&D spend and little revenue to show yet, so this likely contributes significantly to overall R&D spending, but it also spends heavily in its core business. Samsung and Microsoft spend at very similar levels, with Apple just a little behind in dollar terms, and Facebook spends by far the least, though its spending is also rising rapidly. On a percentage basis, however, it’s again Facebook that leads the pack, spending over 20% of its revenue on R&D, with much of that spending driven by high stock based compensation costs in some of its acquired businesses like Oculus. Apple, meanwhile, has increased its share of revenue that goes to R&D from 2.5% to 5% over the past few years, but still lags considerably behind almost all the others in percentage spend due to its sheer size.

Lastly, when it comes to hiring, Amazon continues to be in a league of it own, and now employs nearly 400,000 people globally, with over 100,000 of those added in the past year (with the increase roughly equivalent to either Apple or Microsoft’s total headcount a year ago). And of course the composition of these companies’ workforces is very different, with many of those Amazon employees being warehouse and fulfillment center workers, while most of those at its competitors work in engineering roles, with the exception of Apple’s large retail workforce.

That has implications for revenue per employee, where Amazon continues to be the lowest, and Apple remains just in front of Facebook. However, Amazon said on its most recent earnings call that an increasing proportion of those it’s hired lately have been sales people for its AWS and advertising businesses, with the latter a fast-growing but often overlooked part of Amazon’s overall operation. Facebook managed to hire more people than Alphabet this past quarter as it accelerates its own investment in sales and other parts of its workforce, and both of those companies are predicting a rapid rise in the second half. Apple, meanwhile, slowed hiring as its revenues fell, and although there have been some signals of a rise recently, we’ll have to wait for its 10-K for formal confirmation. Microsoft, meanwhile, added roughly 10,000 employees when it acquired LinkedIn, but has also made layoffs in its sales organization twice in the past year or so, and continues to shrink its manufacturing headcount following the decline of its phone hardware business.